State of IFRS around the world: Brazil Fully Converged to IFRS

Early in 2011, Brazilian listed companies began the first wave of reporting using newly converged IFRS and, not long after, the rest of the industry followed. Sheena Rossiter looks at the impact of IFRS six months on since full-convergence.

On a cold winter’s day in late August 2011, accountancy professionals gathered at the Caeser Business Paulista hotel in the centre of Latin America’s largest city, Sao Paulo. They were there to discuss what life is like in the profession after Brazil made the full adoption of IFRS back in April.

At software company, Systema Consultores Associados annual meeting - Building a New Financial Management and IFRS - it was clear that interest in Brazil hasn’t slowed down with the rest of the global economy, even with the slow pace and high cost of doing business here.

It has been more than half a year since South America’s largest economy joined 120 countries in making the full-adoption to IFRS. Brazil was the first Latin American country to do so and is expected to set the standard for full-adoption in the region.

Mexico and Argentina are looking to make the full switch to the standards in 2012. Chile has been a partial adopter of IFRS since 2009 but several laws require amendments before full adoption can take place.

Bolivia has set 2013 as the date when it will move to IFRS and Colombia hasn’t made any concrete timeline but a convergence plan is in the works.

The switch to IFRS in Brazil has continued to bolster the country’s growing economy by having clearer financial statements, which is creating a welcome mat for foreign investments.

"To a certain point, IFRS does make trade easier. But it’s more about transparency and letting people know what state the company is in," explains Paul Sutcliffe an Ernst & Young Terco assurance partner based in Sao Paulo.

"If you want to do trade, you want to know what type of state their balance sheets are in. For this type of situation, IFRS is useful. Before, that didn’t really happen."

Transitioning over

Partial adoption towards IFRS in Brazil started in December 2007, when law 11.638 was cleared as a way to set a convergence path for the country’s old reporting system, Brazilian GAAP (BR GAAP), to expand its scope of statutory IFRS audits.

The new law, which modified Brazil’s corporate law, put partial adoption of IFRS into motion at the beginning of 2008 under the watch of the Securities and Exchange Commission in Brazil (CVM) – the governing body that regulates IFRS for all non-banking listed companies in Brazil. But despite the law, full use of IFRS was still only optional.

The start of 2010 marked the first year all publicly-listed companies on Brazil’s stock exchange, the Ibovespa, had to move onto IFRS.

Companies with assets of more than BRL300m ($175m) or with revenues of more than BRL240m are required to use IFRS and have to have their financial statements audited under accounting standards developed by the Accounting Principles Committee (CPC).As of the second week of September, there were 539 publicly-listed companies on the Ibovespa.Financial institutions regulated by the central bank and insurance companies regulated by the Superintendence of Private Insurance had similar IFRS mandates and began consolidating their financial statements in 2010 as well.

IFRS adoption has made investing in Brazil easier for those interested in the Latin American giant. With more comprehensible statements, investors can now invest in Brazilian companies without having to apply a risk premium, which happened under BR GAAP.

The risk premium was a cost put in place because of the lack of understanding of the old reporting system by foreign investors.

"If you think about how it was before, Brazilian companies would always publish their accounts, but people would think ‘what is this?’," Sutcliffe points out.

"What’s allowed in Brazil and what isn’t was a bit of a mystery to investors even though Brazilian companies would publish their accounts. Investors didn’t have time to know and learn what the Brazilian GAAP was."

Now the world’s seventh-largest economy in terms of nominal GDP, Brazil was the last country to go into recession and the first to come out of it. Last year the country experienced the fastest growth in two decades with an increase of 7.5% GDP in 2010. Even with investment bank Morgan Stanley downgrading Brazil’s growth forecast for 2011 from 4% GDP to 3.7% in August, Brazil still has a higher projected growth figure than those coming from the developed world where markets remain shaky.

Foreign direct investment (FDI) in July totalled close to $6bn higher than the central bank’s estimated $4bn for the month. At the end of July, the 12-month total of FDI in the country was $72bn. By the end of 2011, the central bank is predicting a total of $70bn in FDI will have come into Brazil, an increase from the $45bn posted the year before.

Brazil ranked fourth on the 2010 Foreign Direct Investment Confidence Index, one spot ahead of Germany and in front of the UK, which ranked 10th.

For 2011, the index projects that Brazil will remain among the top-five countries in terms of FDI. Most of this growth is expected to stem from M&A activity from transnationals in India and China, the latter which has overtaken the US as Brazil’s biggest trading partner.

"Having IFRS helps foreign investors understand what’s going on more easily," Sutcliffe says. "Even though Brazil is growing, it doesn’t have enough weight for other people to want to have to learn the BR GAAP."

Brazil complied with the target for all G20 nations to make the switch over to IFRS, an initiative which is looking to get the world’s most important economies to adopt the reporting standards in this year or next. The switch over from BR GAAP to IFRS was not as smooth a transition as some had hoped for.

Taxes still high and complicated

IFRS in Brazil makes for a "complete and formal divorce between the tax accountant and the financial accountant", as professor Nelson Carvalho puts it, former securities commissioner in the 1990s and one of the architects behind the implementation of IFRS in Brazil.

He says even though balance sheets have become more transparent, the switchover to IFRS hasn't made the Brazilian tax system any simpler.

"The Brazilian tax rules keep exactly as they were. Now that tax rules aren’t linked to the accounting rules, if there is a change in an accounting rule, there is no effect for tax purposes," IFRS in Brazil specialist professor Eliseu Martins explains. "For example, the change of not having to pay a risk premium anymore does not change the amount of taxes that have to be paid when investing in Brazil."

Taxes still remain notoriously high and complicated in Brazil. For investors looking to partner or set up a business in the country, they will be faced with layers and layers of taxes from state and federal to product and import taxes.

Businesses spend about 2,600 hours per year filing taxes, and out of 183 economies Brazil ranked 152 for paying taxes, according to the World Bank’s 2011 Doing Business survey.

The report also ranked Brazil 114 for trading across borders, with import costs running about $600 more per container, imports taking up to six days longer and requiring almost double the amount of documentation compared to Organisation for Economic Co-operation and Development countries.

Even though the universality of IFRS is a more inviting reporting standard for foreign investors, Brazil’s complicated, high taxes, in combination with slow bureaucracy, still hold investors back from wanting to invest in Brazil.

SMEs struggling to switch

Even after six months, not everyone has made the switch to IFRS. Theoretically, all Brazilian businesses should have made the change to the new reporting standards in December 2010. But small- and medium-sized entities (SMEs) are still falling short of using IFRS as their form of reporting.

"The smaller-run family businesses still regard accounting as something that you do for tax. And they are more interested in the cash management of their business rather than the financial reporting on that side of things," Sutcliffe says.

"What drives people to a new system is force. But family-sized businesses don’t need to be audited and they don’t need to publish their financial statement."

In a region where SMEs dominate the market place, for those who don’t make the switch onto IFRS, it might limit their ability to expand their business if they one day choose to partner or trade with foreign companies.

"A large portion of SMEs don’t apply IFRS because they have no public accountability and they have no one to handle those sophisticated reporting sheets," Baker Tilly Brasil international liaison partner Ricardo Rodil says. "They have just stuck to BR GAAP."

Rodil, who helps incorporate foreign SMEs into Brazil, recommends all foreign SMEs to have some knowledge of IFRS before looking to set up their business in Brazil, or before partnering with a Brazilian company. But, he admits, where Brazil has fallen short is on training for SMEs about IFRS.

"SMEs need staff and need people trained up. It’s a process," he says. "They are in the process of getting it switched over. In my view, Brazil will be in good condition to change everything by 2012."

Training falling short

There have been various programmes put into place in the run-up to the full-adoption of IFRS by the Institute of Independent Auditors of Brazil, the CPC and the Financial and Accounting Research Institute Foundation.

However, members of the profession like Martins, admit there is still a shortage of IFRS-trained accountants throughout Brazil.

"We still have some problems finding IFRS-qualified accountants [in more remote areas], but in the big cities there are many qualified professionals," he says.

Martins points out that Brazil has had teething problems with its full adoption of IFRS, but that the move, overall, is positive for the economy.

"There is no doubt IFRS adoption has made improvements in Brazil. Research is already showing this. The transition was not so smooth, but everybody always thought it wouldn’t be smooth, even with lots of preparation time. This has been the case of many countries."

Source: The Accountant